Recently I met with a CEO friend of mine who runs a late stage SaaS company that sells a industry specific business process automation software. The company is currently going through the infancy-to-adulthood transition. They have a great product and a excellent customer base, but the downturn and reluctance on the part of customers to sign checks has made them look for efficiencies in other places. During our conversation about the general business environment and challenges faced by companies naturally we delved into the topic of managing the cost of customer acquisition, implementation costs, maintaining profits etc. As our discussion progressed I thought this would make a good post given that most companies are in the same boat – managing their operations efficiently cutting costs, reducing the burn and maintaining the margins.

In the several years that I have worked in the on-premise enterprise software world, I have seen many software implementations go awry with thousands of dollars in ballooning cost spent on implementations. Customers never see the elusive ROI until many years into the implementation. By then they are so deep into upgrades, manpower turnover, shrinking IT budgets, IT organizational fiefdom, you get the picture. ROI is the last thing on their mind – keeping the lights on becomes their focus.

Clearly, as this unfolds the software vendor is bearing very little risk, since they have pocketed the license dollars and completed the press release on the customer acquisition. Customer is taking on the additional burden of the incremental implementation costs with the system integrator milking them.

With SaaS, the tables are effectively turned on the software vendor. The SaaS software vendors (to their own detriment) have perpetuated this notion that, with SaaS, the implementation would be easy 1-2-3 and there you go. In some cases, it is but we all know, enterprise software implementation is much more than just the software.

To really get to that state of customers doing their own implementations and onward to use the application, the vendor has to invest a lot in creating guided implementation tools, migration tools, WYSIWIG integration tools. If you look at the current stable of SaaS vendors, very few have that kind of maturity.

Most smaller SaaS companies operate more in the Software+Services model than pure Software model. Me, I think this is a flawed strategy. As a startup you are much better off building a product that is simple to implement by the customer themselves with guided implementation wizards etc and focus all your energies on building a great product. Selling a product is tough enough, then to add a service fee on top of that for implementation will only result in additional approvals and prolong the sales cycle. Nevertheless, the reasons behind companies going with this strategy is usually bi-fold.

Firstly, the technology they are building is still evolving so there are only few people beyond the employees of the company who can implement and guide customers through this process. That way, working closely with customers the companies can understand the gaps better and manage the bumps on the road much better.

Second and more important reason is, being small, the companies can ill afford to lose the revenue that comes via the services arm. The services revenue helps in augmenting the minuscule subscription revenue when the product footprint is small.

Back to the topic at hand – Cost of Implementation…

In the eagerness to close the deals, companies try to sign customers to deals where they underestimate the effort involved in implementation. Unlike in a license deal, the subscription fees that make up the MRR, includes all cost of sales and cost of operations. As a SaaS vendor, while you can charge customer for actuals in implementation, if you overshoot the implementation cycle, you are doing it on your own dime, as most of the implementations are typically fixed price. (Would love to hear if other companies are doing it differently)

So given this dichotomy here are five things a SaaS vendor can do to acquire customers without giving a sticker shock (of the initial implementation costs) while maintaining your margins.

Map-Gap Analysis: As anyone who has done software implementations will attest, the most challenging part of implementation is the part where you need to define the business process. You can spend a lot of time just capturing all the information about the business process from the numerous pockets in a company. If you have a implementation deal which is a fixed price – 1 week – $10,000 dollars, you might spend a lot of time in honing in on the business process. So to mitigate this you should define business process blue prints and have the customer map their current process to it even before you quote a implementation price. This way you will be much closer to the actual implementation scenario than uncovering the facts as part of a pre-costed implementation.

Best Practice Templates:Unless you are one of those companies that does not clearly know where you fit in, you should exactly know your customer demographics across target industry segments. Based on that you should go ahead and create best practice configuration templates. Here are things I would include as part of the templates

standard business process

workflows

setup data

roles and responsibilities

meta data

labels, instructions and error messages

While it is a one-time thing for you, you can reap the rewards over and over across multiple implementations. This will allow you great latitude to aggressively price the implementations. As you tailor specific customer needs over and above the best practice templates, you can keep dovetailing those needs back into the blueprints and revving them up. This will also be a significant competitive advantage in terms of TCO and creating mind share.

Crowd Source: One of the great things of the times we are in is companies and individuals in those companies are opening up to concept of sharing and reaping the benefits of collaboration. Collaboration, when done properly, can create value for all the parties involved. When you are a SaaS startup, you want to keep the operations lean and optimize all the activities. One such way is to leverage your existing customer base to help you get better. As you incorporate your learning from one customer implementation to another, it makes for a more compelling story if it is actually being told by the customer impacted by it. Not to mention that your next customer coming from the same industry can relate to them much better than you portraying the scenario.

Most companies invariably sell to customers who amongst themselves might be die-hard rivals in their own industry. So it is easy for a technology vendor to wonder, if it would be wise to get connect two such customers and if they would open up to such propositions. Also factors into it, is the fear that the two customers might end up discussing the parameters of the deal for the software and the sweat-heart deal you gave to one might become the standard deal for all. But I am here to tell you, that no matter what you do, that information will end up getting shared, if it has to.

So instead of worrying about those things, think of all the value it generates when two leaders in a industry collaborate on your software platform. They might just end up helping you define your future product strategy. I think that is a great problem to have. I will expand on this in a separate post, but for now suffice to say, that getting customers into a collaborative self-help community might go a long way in reducing the bumps along the implementation path and reduce your cost of implementation.

Implement in Phases: It is always tempting and some time seems easy to do a big bang implementation than to do it in phases. To me if you are not being able to identify logical phases of implementation it indicates a software vendor trying to make it easy for themselves. As with any software, implementing the entire product invariably involves multiple stakeholders, teams at customer site and some time multiple locations. This is where the implementation can end up ballooning. So as a software vendor(and a trusted adviser as I would like to think of myself), it is incumbent upon me to define the logical phases and impress upon the customer the value of doing so. I like to call it “peeling the onion”. Always keep at the forefront and highlight the ROI that can be achieved in each phase and it will be a easy thing to explain. It also allows you do a soft landing when it comes to the implementation costs.

Smell the Roses: In the initial stages it is a difficult thing to do things for free but you will have to bite the bullet. Customer pays for something which is fully-functional but your solution might be far from it. They don’t understand the intricacies of software implementation. So at times, be benevolent and let some of the costs go as it is in your interest to make those early or critical customers happy. Also look at it this way, the customer is ready to take a chance on your incomplete product and let you bake it on their stove (and dime). So all along the way enjoy the experience and don’t make the fact that you are incurring a small loss spoil the experience.

Hope this is useful for a start. I am sure other companies in similar situation have done other creative things to keep the costs down. Would love to hear from others.

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About Subraya Mallya

Subraya Mallya is a technology executive, entrepreneur involved in conceiving, building software businesses. In this blog, he focusses on business and technology strategies around Business Model, Product Development and Marketing.Connect with me on Google+, Twitter - @subrayamallya

We recently entered into a 12 month contract for a SaaS model ERP system. The vendor is using a few of the suggestions Subraya mentions in the article, but I’m trying to find other ways of reducing the impact of these implementation costs on our bottom line. Does anyone know of a provision in GAAP that would allow amortization of implementation costs in conjunction with such a subscription contract to extend beyond the contract term (perhaps mirroring the useful life of proprietary purchased software)?

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